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In the latest Bitcoin news, the largest bitcoin exchange has had its US bank account seized by Homeland Security Investigations for failing to register as a “money transmitter” in the US. HSI apparently had someone setup a Mt. Gox account and transfer funds between Dwolla and Mt. Gox in order to buy and sell bitcoins. According to HSI, this constitutes a breach of US legal code because Mt. Gox’s US subsidiary, Mutum Sigillum, is not registered as a money transmitting service.

As part of the account opening process, Wells Fargo required Karpeles and Mutum Sigillum LLC to complete a “Money Services Business (MSB) Accounts, Identification of an MSB Customer” form. That document was completed on May 20, 2011 and identified Mutum Sigillum LLC as a business not engaged in money services. The application asks several questions; to include, “Do you deal in or exchange currency for your customer?” and “Does your business accept funds from customers and send the funds based on customers’ instructions (Money Transmitter)?” Karpeles answered these questions “no,” indicating that Mutum Sigillum LLC does not deal in or exchange money, and that it does not send funds based on customer instructions.

Money transmitting businesses are required by 31 USC section 5330 to register as such with FinCEN. According to FinCEN records on May 6, 2013, neither Mt. Gox nor the subsidiary, Mutum Sigillum LLC, is registered as a Money Service Business.

The affidavit continues:

Mt. Gox acts as a digital currency exchange where customers open accounts and fund the respective accounts with fiat currency, which is then exchanged into crypto-currency by Mt. Gox; the crypto-currency is known as bitcoin. Fiat currency simply refers to any money that a government has declared to be legal tender. The exchange is bidirectional and allows customers to also exchange bitcoins back into fiat currency, and then withdraw those funds. The exchange of fiat currency and bitcoins incurs a floating rate fee charged by Mt. Gox and is determined by the customer’s aggregate amount of funds exchanged on a monthly basis.

At first glance, it might appear that Mt. Gox is in clear violation of the law, but I personally think that is an extremely bad interpretation of what “the law” actually says.

You see, Mt. Gox can only be in violation of the law if they actually “transfer funds on behalf of the public.” I would argue that Mt. Gox never transfers any funds on behalf of the public. Dwolla takes care of the fund transfers between Mt. Gox and the customer. All Mt. Gox does is hold the funds until the customer either uses them to buy bitcoins or cashes them out for dollars. Any movement of actual dollars on Mt. Gox can only take place through services like Dwolla, which are registered as money transmitter services.

In order to argue that Mt. Gox acts as a money transmitter, it would have to be proven that the transfer of bitcoins between Mt. Gox accounts constitutes a “transfer of funds.” This is something that seems rather absurd to me by our own legal standards. Bitcoins are not “funds” or money as defined by US law, they are a commodity. For example, if Mt. Gox setup its exchange to swap holdings of dollars for apples, and then transferred ownership of the apples between Mt. Gox members, they would not be in the business of transmitting money, they would be in the business of trading apples. And if the act of trading apples is considered a violation of the law, then ALL businesses that sell and buy goods would need to register as money transmitters, which equates to practically every business in existence.

Money is legally defined as “a medium of exchange authorized or adopted by a domestic or foreign government as a part of its currency.” Cushman v. GC Servs., LP, 2009 U.S. Dist. LEXIS 92863 (S.D. Tex. Aug. 13, 2009) Obviously this is a legal standard that Bitcoin fails to meet. Clearly this assault on Mt. Gox is nothing more than a desperate attempt by a failing empire to retain its control over the flow of resources around the world. As the Bitcoin network grows, we can expect similar measures to be taken by desperate gangs of elected criminals around the globe.

People should question why businesses should be forced to register as money transmitter services at all. The only reason for such measures is to ensure that the state can monitor every single financial transaction that takes place within its borders. Last time I checked, freedom did not entail the state having access to everyone’s financial records without probable cause. Not that I think the US Constitution is worth a damn, but I seem to recall something about, “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”

By creating a law that says all “papers and effects” must be turned over to the state, and then issuing a warrant based on the failure to comply with this law, it turns the notion of probable cause on its head.

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I think your argument is spot on, and I came to a similar conclusion after reading the affidavit.

Jonathan Jaech

Good analogy to the apple exchange, although a closer one might be a stock exchange or options exchange. I wonder if US requires those exchanges — which are also engaged in the business of accepting or paying dollars for intangible bits of information — to register as money transmitters.

emptytitle

Where are you getting your definition of money from? After reading through a few Google results it looks to me as if our legal definition for money is far more comprehensive than you are claiming here. One of the laws I read included any conceivable kind of ledger, metal, chattel, or other store of value that exists primarily for that purpose. Perhaps you know of some legal cases that have changed this?